Congress is considering legislation requiring corporate shareholder straw votes on CEO pay. Is this good for shareholders? What about society as a whole?
Some see such votes as an untoward interference in private business. Shareholders are the ones hurt if executive pay really hurts profits, and they already have avenues to bring their concerns to the board of directors.
In this line of thinking, incentives for optimal corporate governance already exist. If excessive compensation hurts a corporation’s return to stockholders, rational, profit-maximizing investors will shun that company’s shares and buy those of other firms that limit CEO pay.
These market forces will boost the share prices firms that limit excessive salaries and lower those of firms that overpay. Corporate boards will respond accordingly.
Those favoring shareholder votes argue that the market fails because of “collective action” and asymmetric information problems. Grand Forks native Mancur Olson described this in his seminal 1965 book “The Logic of Collective Action.” A small group of people with much to gain can overcome the interests of a vastly larger group, each of whom only will lose a little. Total gains by the small, highly motivated group may be much less than total losses of the larger group. But the incentives are such that the small group with much to gain will win out over the larger group. Society as a whole ends up worse off.
Olson wrote of special-interest groups securing special favors from government. But the same idea applies to cliques of executives securing compensation levels that harm many thousands of shareholders.
The CEO and his or her buddies gain hundreds of millions of dollars. Any particular shareholder may lose a few hundred. The top executives have superior information and power. Any single shareholder lacks both.
By this argument, legislation requiring shareholder approval of top management compensation merely makes the playing field a bit less tilted. Rather than untoward interference in private decisions, it corrects a market failure.
One might compare the legislation to requirements that labor unions hold a vote of their membership before going on strike. Long required in the United States, such votes were not required in Britain until Margaret Thatcher. An old-line Marxist like Arthur Scargill could force coal miners to strike repeatedly with no vote.
Are strike votes required by the U.S. National Labor Relations Act undue interference in private organizations? Or are they useful protections of individuals against abuse by leaders? Do they help or hurt economic efficiency and fairness?
This analogy is not perfect. No one is forced to buy a share of stock, but in many states workers effectively must join a union when they take certain jobs. Moreover, there are no blocs of union votes comparable to the millions of shares that institutional investors like TIAA or Calpers can vote at an annual meeting.
2007 Edward Lotterman
Chanarambie Consulting, Inc.